The introduction of new products and tools aimed at boosting liquidity may help Kenya support growth of its capital markets during a period of broader emerging market volatility.
In line with other emerging markets, the Nairobi Securities Exchange (NSE) 20-share index has been affected by a decline in investor confidence − sliding by about 17% since the start of the year − on the back of a strengthening US economy and weaker economic performance in China.
“With improved US economic growth prospects and heightened speculations as to when the [US Federal Reserve] will increase interest rates, capital flight has been evident in emerging markets, particularly Kenya, leaving markets bleeding, as evidenced by the nose diving indices,” a recent Old Mutual economic analysis of sub-Saharan Africa said.
Investor sentiment has also been hit by a weaker Kenyan shilling, which has depreciated by around 16% year to date against the US dollar, currently standing at less than $0.01 per shilling.
“Until recently, about 70% of stock market turnover was generated by foreign investors, but this has since declined to around 60%,” Jimnah Mbaru, chairman of Dyer and Blair, a local investment bank, told OBG. “Part of this is likely due to the steadily declining shilling, though regulatory uncertainty and global macroeconomic instability have also played their part.”
Modernising Kenya’s capital markets
In the face of this global market uncertainty, the NSE and Capital Markets Authority (CMA) are taking a series of steps to support long-term growth in the exchange. Among the initiatives being rolled out are new products to boost liquidity and help attract more domestic retail investors, given that only 4% of the local population currently participates in the local market.
One such investment vehicle is an exchange-traded funds (ETF) segment, which is due to be launched before the end of the year, with the NSE having already submitted proposed trading rules for review.
Other initiatives include a new securities settlement platform, expected to go live in the next few months, which will feature functionalities such as same-day trading, settlement services for government securities, and securities lending and borrowing to facilitate short-selling and other investment strategies.
The country also plans to launch a derivatives market in the fourth quarter, which will make the NSE the second bourse in sub-Saharan Africa after Johannesburg to offer such instruments. Initial offerings on the long-awaited market will focus on agriculture and mineral products, followed by mining and power.
“There is great demand and appetite for the derivatives market in Kenya, from both investors and market participants,” Geoffrey Odundo, CEO of the NSE, told OBG. “Derivatives will not only offer a wider range of investment channels, but also give individuals, corporates and farmers a view of the future prices of currencies, interest rates, minerals and agricultural products. We believe this market will revolutionise Kenya’s capital markets industry.”
Perhaps more pertinently, the CMA and NSE are looking to raise the number of companies traded on the bourse by encouraging additional listings on the Growth Enterprise Market Segment (GEMS), an alternative board comprised of small and medium-sized enterprises (SMEs).
As with other alternative and smaller-cap markets across the continent – including the NILEX in Egypt and the GAX in Ghana – attracting SME listings has proven difficult in Kenya. Just four companies have listed since GEMS was launched in January 2013.
According to Mbaru, the slow growth of the equities market is due to local conditions, including the country’s low manufacturing base and the availability of other means of finance. “Currently only around 12% of GDP comes from manufacturing. This is not enough to support equity market growth,” Mbaru told OBG. “Kenya needs to focus on developing its manufacturing and industrial sectors, as these are the prime candidates for long-term capital secured by way of the markets.”
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